The Securities and Exchange Commission voted to adopt rules requiring market participants that have important liquidity-providing functions to comply with federal securities laws, bringing cryptocurrencies into the mix.
The SEC voted 3-2 to adopt that rulemaking at a meeting Tuesday, which in its proposed 194-page format included a mention of cryptocurrencies in a footnote. The 247-page rule adopted Tuesday will apply to people who transact cryptoassets that meet the definition of securities or government securities, with the exception of having assets less than $50 million. The rules would affect decentralized finance, according to the adopted rule.
"Whether a person's trading activities in cryptoasset securities, including products, structures and activities involved in the so-called DeFi market, meet the definition of 'as part of a regular business' as set forth in the final rules (i.e. the person engages in a regular pattern of buying and selling cryptoasset securities that has the effect of providing liquidity to other market participants as set out in the qualitative standard), and no exception or exclusion applies, that person should register as merchant or government securities broker," according to the standard.
The crypto industry rejected the rule in comment letters to the SEC after the rulemaking was first proposed in March 2022. Some commenters said the rule was unreasonable for DeFi products because they do not have a watchdog. central and are just software.
The DeFi Education Fund elaborated on the role of automated market makers in its comment letter, calling it an “execution protocol.” Automated market makers, or AMMs, deploy a liquidity pool of cryptocurrencies and other digital assets and lock them into a smart contract that then facilitates trading, according to the fund.
Industry response
The DeFi Education Fund called the regulations adopted on Tuesday “misguided and unworkable.”
"While the SEC acknowledged receiving feedback on DeFi, including our concerns, the SEC not only failed to confront the substance of our concerns, but also failed to articulate any discernible path to compliance for DeFi market participants," the CEO. Miller Whitehouse-Levine said in an emailed statement. "YO“Imposing obligations on entities in the DeFi ecosystem that cannot be met is wrong, impractical, and hostile to innovation.”
Cody Carbone, vice president of policy for the Chamber of Digital Commerce, called Tuesday's vote ""Another example of the SEC's continued hostility toward the digital asset industry."
“We are asking more market participants to register as traders, abandoning decades of precedent to apply impossible rules to digital asset market participants,” Carbone said in a statement. "The SEC did not want the digital asset industry's perspective on this rule, despite its impact, as the 200-page proposed rule only mentioned digital assets in a footnote."
Commissioner Peirce's rejection
Republican Commissioner Hester Peirce, who voted against the rule, rejected some aspects of the rule during Tuesday's meeting.
"The statement doesn't spend much time talking about cryptocurrencies, but does explain that an automated market maker may have to register as a trader under the final rules," Peirce said. "An AMM is, as I understand it, just a software protocol, so how do you register as a distributor?"
An SEC official, responding to Peirce, said that an AMM is more than software.
After some back and forth, Peirce asked how many people posting liquidity in MMA groups would be included in the rule.
"This is a market that is not transparent or compliant, so unfortunately we don't have good data," the SEC official said.
"I mean, I think one of the reasons they don't comply is because they can't understand what our rules are and they can't even understand when we think something is a value," Peirce said in response.
SEC Chairman Gary Gensler highlighted the $50 million exception limit and said there is demand in both the crypto and non-crypto space.
Earlier in his opening remarks, Gensler said the rule as a whole is necessary to protect investors and noted that markets have evolved to become faster with the advent of electronification and algorithmic trading. He said the companies are acting as "de facto market makers" and have not registered with the SEC as distributors, which would require them to report data and maintain books and records.
"To me, these measures are just common sense," Gensler said.
"Congress did not intend for regulatory and registration requirements to apply to some traders and not others. Absent an exemption or exception, if someone trades in a manner consistent with de facto market making, they must register as trader, which is consistent with Congressional intent, but also somewhat competitive, makes it fair and level," Gensler added.
The final rules will take effect 60 days after their publication in the Federal Register. The compliance date will be one year after the entry into force of the final rules.
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